The main measure of the size of a nation’s economy is its gross domestic product. GDP is an economic indicator that measures a country’s total economic output. Gross domestic product is the market value of all final goods and services produced within a country during a given period of time. A steadily growing GDP is generally considered a sign of economic health. The Department of Commerce’s Bureau of Economic Analysis has the job of measuring GDP.
Our economy produces a vast variety of goods and services. The Bureau of Economic Analysis attaches a market value to each product. Market value is the price buyers are willing to pay for a good or service in a competitive marketplace.
GDP is based on the market price of every final good or service that can be sold in a country. A final good is any new good that is ready for use by a consumer. Goods that are used in the production of final goods are known as intermediate goods. Their market value is not counted in GDP because it is included in the market value of the final good.
Goods and services must be produced within the country’s border to be included in GDP. The firms that produce the goods and services do not have to be American owned. Cars manufactured in the United States by foreign automakers are included in the United States’ GDP.
The Bureau of Economic Analysis calculates the GDP every quarter or three month period. Economists use the calendar year GDP to compare production from year to year or from country to country. This annual GDP includes all final goods and services produced between January 1st and December 31st. Goods do not have to be sold during that period to be included in GDP.
Economists calculate GDP by measuring expenditures on goods and services produce in a country. They divide the economy into four sectors: households, businesses, government, and foreign trade. Each sector’s sending make up one of the four components of GDP: household consumption (C), business investment (I), government spending (G), and the net of exports minus imports (X). Putting it together, the formula for calculating GDP is:
GDP = C + I + G + X
Household consumption, “C”, consists of goods and services bought by people in households for personal use. Household consumption ranges from food and fuel to movie tickets and medical care.
Business investment, “I”, consists largely of business investment in capital goods, such as buildings and machinery. It also includes goods produced but not yet sold.
Government spending, “G”, on the purchases of goods and services are also included in GDP. We do not count government transfer payments, such as welfare or Social Security benefits, as part of GDP. These payments do not create new production, nor do they involve the purchase of goods or services by the government.
In calculating the impact of trade on GDP, we focus on net exports, “X”. Net exports are the value of all exports minus imports. This makes sense because when a country exports goods and services, those exports bring money back home. The sale of these goods increases the exporting country’s GDP. However, the opposite happens when a country imports goods and services. The money used to pay for these imports leaves the economy, thus decreasing the importing country’s GDP. Net exports can be either positive or negative. When exports exceed imports, net exports are positive and increase GDP. When imports exceed exports, net exports are negative and decrease GDP.
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